US-Russia relations to become even worse in 2018, report shows

A woman walks past an election poster reading “Strong President Strong Russia” in support of Russian President Vladimir Putin (R), and a self-nominated candidate in the upcoming presidential election and Presidential candidate from Russian Communist Party Pavel Grudinin (L), in St Petersburg, Russia, January 16, 2018.

Although US-Russia political relations deteriorated in 2017, it was a relatively good year for foreign businesses in Russia. However, the indications are that the relationship between Washington and Moscow is about to become even worse in 2018, Chris Weafer, a partner at Macro Advisory in Moscow, noted in a summary of a report issued on January 17.

“The catalyst for this deterioration is expected to be the publication of the so-called Section 241 and 242 reports, which are required to be submitted to Congress by 29 January as per the terms of the 2 August ‘Countering America’s Adversaries Through Sanctions Act’ (CAATSA),” Weafer wrote. “The Section 241 report will be a list of individuals and entities identified as being at risk of being sanctioned in the future while Section 242 will examine the consequences of adding Russian sovereign debt to sanctioned credits,” he added.

Weafer noted that these reports would not automatically trigger any sanctions expansion but they would heighten investment risk and create a dangerous backdrop coming into the presidential election on March 18 and, especially, as the row over alleged violations of the INF (Intermediary Nuclear Forces) Treaty continues to escalate. “Both Congress and the White House have said they will add new economic sanctions to try and modify Russia’s actions,” Weafer wrote.

He explained that while it is hoped that the White House may try to adopt a more cautious approach to sanctions expansion, members of US Congress continue to make clear they want both expansion and tough enforcement.

Weafer reminded that members of Congress recently published a 200-page document alleging the Kremlin’s asymmetric attacks on democracy and the threat to US national security. Congress may limit the White House’s options.

Russian President Vladimir Putin has also adopted a much tougher stance and has clearly promised equal retaliatory actions in the event of US sanctions expansion, Weafer wrote, adding that what shape that retaliation takes will likely depend on how damaging will be any new measures from Washington.

“Secondary sanctions are now a factor. Even though the focus is on Washington, investors from the EU and elsewhere will also adopt a more cautious stance until the risks are clarified. That is because the CAATSA legislation introduced the risk of secondary sanctions to non-US citizens and companies,” Weafer wrote, noting that in the event that the US does proceed with new and damaging sanctions, Russia’s response, despite the promise of an equal response, is actually expected to steer away from any action that may damage inward investment or disrupt the World Cup.

“The economy clearly needs a steady increase in investment and the involvement of foreign expertise if it is to move towards its growth potential. The latter is a very important showcase for Russia and for Putin personally. In addition, the Kremlin will not to engage in reciprocation that might then make it more difficult for EU investors to come to Russia, especially as a growing number of EU politicians have been critical of the threat of additional US sanctions,” Weafer wrote.

He further noted that if the price of oil remains in the high $60s per barrel, then Russia could achieve a balanced budget in 2018. That would ease financial strains and minimise any need for sovereign debt issuance.

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